The Dos and Don'ts of Using Home Equity Mortgage Loans for Home Improvements
Many homeowners want to renovate their homes, but few have the financial means. If you wish to enhance the home's aesthetics and comfort or improve its functionality, you'll need to invest significant money.
Some popular ways to fund home renovations and improvements include using personal savings, refinancing your mortgage, and tapping into your home equity. In the sections below, you'll learn everything there's to know about home equity mortgage loans for home improvements. Call BMC Mortgage & Investments today to discuss your options.
What are Home Equity Loans?
Homeowners who have built significant equity in their property often have the option to borrow a loan against that equity. Your home equity refers to the difference between the amount of money owed on the mortgage and the property's current value. If you have an outstanding mortgage of $200,000 and the home is currently valued at $900,000, your home equity is $700,000.
Unlike the Home Equity Line of Credit, home equity loans are a lump sum with fixed interest rates and a specified repayment period. These loans are flexible, allowing you to use them for several reasons.
Why use Home Equity Mortgage Loans for Home Improvements?
A home equity loan comes in handy if you do not have enough personal savings and do not want to incur the high-interest rates of personal unsecured loans. But what are the advantages of tapping into your home equity when running home renovations and improvements? Besides lower rates and convenience, here are the other benefits:
- Potential tax benefits: the interest you pay on the loan may be tax-deductible if you use the money to make qualifying home improvements and renovations.
- Large loan amounts: provided you have built enough equity and have an excellent credit score, you can get a loan of up to 90% of your home equity.
- Predictability and peace of mind: when the rates and terms are fixed, you can better manage your finances and plan how to repay the loan in time.
How to Use Home Equity Loans for Home Improvements: The Dos and Don'ts
Now that you know what a home equity loan is and how it works, let's look at the Dos and Don'ts of securing and using these loans for home improvements.
- Know what you want: before tapping into your home equity, understand your needs and how the loan will help you achieve them.
- Create a budget: your home improvement project should have a detailed budget, highlighting all the expenses and any unexpected costs that may arise.
- Do your research: check out different lenders and compare their loan terms and features. Always choose a reputable lender offering competitive rates and favorable terms.
- Prioritize home improvements with long-term value: Focus on projects that add long-term value to your home or property. These may include bathroom or kitchen remodels, additional living space, energy-efficient upgrades, etc.
- Keep track of expenses: update your records regularly. This will be useful for accounting purposes and potential tax benefits.
- Don't be in a hurry: home improvements and renovation are great, but you don't want to rush the decision. There's a time for everything, and if you must wait until you build enough equity or improve your credit score, please do!
- Don't go overboard: Renovating your entire home sounds great, but you also want to consider the return on investment. Overdoing the renovation may cost you much without substantially impacting the resale value.
- Don't miss loan repayments: timely repayments help you avoid potential penalties, late fees, and damage to your credit score.
Maximize Your Home Equity Loans
Using a home equity mortgage loan for home improvements may seem simple, but a lot can go wrong. If you are thinking about using a home equity loan to renovate your home, consult BMC Mortgage & Investments today for expert guidance based on your specific needs and circumstances.